Market Insight - August/September 2017
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Behind closed doors

Don't panic, we've got insurance!

With the cost of living rising faster than wage growth, households are feeling the pinch again. It’s not a new feeling for them. Their inflation adjusted earnings were falling for about six years after the financial crisis hit. But now, after so many years of austerity, it seems that they are fed up and turning to borrowing, rather than belt tightening.

Consumer credit has been increasing as households have turned to credit cards, but also other types of financing for swanky cars and the like. Low interest rates make this much more possible than in the past, but it has raised some eyebrows at the Bank of England. It is concerned that higher levels of debt make households more vulnerable to higher interest rates and any worsening in the fortunes of the economy.

But it’s not something to panic about. The UK has high levels of debt compared with some other countries, but most of that is due to mortgages. As house prices have grown, so has mortgage debt. Consumer debt is only 13% of overall household debt. But it is rising fast. In the past year, outstanding car loans, credit card balances and personal loans have increased by 10%, but household incomes have risen by only 1.5%. The interest rates and terms on personal loans and credit cards – and especially car finance deals – have eased significantly, as lenders have taken a more relaxed approach to risk and compete for customers.

Should that be a worry? Not yet, if at all. 40% of households with consumer debt actually have savings bigger than their outstanding debt. But the Bank of England has already made sure that banks cannot easily let credit get out of control in the belief that ‘this time it’s different’. Measures to curb too relaxed an attitude to lending are already in place. In the words of the Bank, these measures should act like a good insurance policy. Any frustrations in lending today are being outweighed by the benefit of a healthier set of households if economic conditions worsen.






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